FEATURE ARTICLE, OCTOBER 2004

THE REAL ESTATE DEVELOPER’S REAL ESTATE LENDER
Fremont Investment & Loan creates loans for complex developments.
Luci Cason

Fremont Investment & Loan’s Chicago office has a leg up on the commercial development lending industry. While bankers and financial analysts helm many of the banks and lending institutions that finance Midwest real estate developments, Fremont’s executives are real estate experts.

“Fremont prides itself on being a real estate lender with real estate people who understand real estate risks,” says Scott Manlin, vice president and regional manager of Fremont’s Chicago office.

Fremont as a whole, and its Chicago office in particular, prides itself on being able to offer borrowers complex transaction analysis and an in-depth understanding of the risks posed by each transaction. Fremont’s assertion that no two projects are alike and, therefore, no two loans are alike, is clearly evidenced in the projects that the company’s Chicago office has been financing lately.

The company’s financing of four high-profile, Chicagoland developments has shown that the office is willing to do its homework to make sure that risky, but ultimately rewarding, projects pay off for their respective developers — and for Fremont.

The Chicago office seems to have the magic touch when it comes to predicting which developments will beat the odds and become successful.

Sometimes these developments are risky because of unproven developers and borrowers, the non-existence of comparable developments or locations that have not traditionally had certain types of development.

Los Angeles-based Wilton Partners is heading a $83.2 million redevelopment of the seven oases that span the Illinois State Toll Highway system in metropolitan Chicago.

There’s virtually no comparison for the $83.2 million Illinois Toll Highway Oasis Redevelopment currently being developed by Los Angeles-based Wilton Partners. In this instance, though, unique seems to equal profitable.

The seven 20,000-square-foot pavilions, or oases, that sit on the bridge structures spanning the Illinois State Toll Highway system in metropolitan Chicago have seen many incarnations since their development in the 1950s. Originally Howard Johnson restaurants, they more recently became fast food pit stops like McDonald’s and Burger King.

“Over the recent years, they had really become dilapidated and they needed serious renovations,” says David Sharp, Fremont Chicago’s vice president and senior loan originator, of the oases. “What everybody really wanted was a viable retail component.”

“To really understand what they are, you have to understand what they came from,” Manlin says of the pavilions. “To have called them an eyesore would have been an understatement. You used to only stop at these things if you absolutely had to.”

Manlin says that the state tollway authority eventually realized that “the only way to extract value, both in tax revenues for the state and to improve these tollways, was to send this redevelopment out to a public/private type venture.”

Wilton Partners came on board as the redevelopment’s private partner and contacted Fremont for financing. Currently, two of the pavilions have been completely demolished and rebuilt, two more are about 60 percent complete, and all seven should be complete by the end of 2005. But, despite their current success, the pavilions were by no means an open-and-shut redevelopment.

“The tough part of the deal is that these are unique assets. There’s nothing like them to really look to in the marketplace to determine rent levels or even occupancy levels,” notes Sharp. “So, we spent a lot of time trying to understand what the opportunity was for retailers.”

That proved to be a difficult task.

Fremont had to get its “arms around the revenue potential for various retailers to decide if they would be viable for the rents that were needed to sustain the costs,” Manlin says, noting the high cost of attempting construction over an operating freeway.

Ultimately, Fremont became comfortable enough with the proposed development to lend 90 percent of construction costs on a limited recourse basis and provide releases as facilities stabilized after the phased-in construction and occupancy period.

Manlin says that, at the start of the project, the only retail remotely comparable to the pavilions was airport concourse retail.

“Like airport retail, you had a lot of traffic, but it certainly wasn’t a destination location,” he notes.

Ironically, since redevelopment began, these highly recognizable, but formerly undesirable, pavilions have become destination locations, as well as stopping-off points for travelers and commuters. Over 800,000 cars pass the pavilions daily and stop to eat and shop at tenants such as McDonald's, Subway, Starbucks Coffee, Panda Express, Krispy Kreme Doughnuts & Coffee, Tropicana Smoothies, Travel Mart and Fifth Third Bank. The pavilions’ locations, which are equipped with Wi-Fi wireless computer Internet connectivity areas and conference rooms, are also quickly becoming a destination for business meetings.

Glenview Town Center in Glenview, Illinois.

Manlin calls the funding of another recent project, the Glenview Town Center, “a leap of faith” in terms of predicting the demand that would arise for retail space and multifamily units developed on the site of a former Naval Air Station that was closed in the late 90s. A more than $56 million loan provided San Diego-based developer OliverMcMillan with capital for the development of a brand new, mixed-use downtown center in Glenview, 20 minutes north of Chicago, with residential, retail and park space, as well as a championship golf course and children’s museum.

“The thing about the Glenview Town Center is that it was a mixed-use town center that was going to be privately owned in a market that didn’t previously exist,” Manlin says. “So, it was a bit of a leap of faith in terms of whether or not there would be a demand for the multifamily units and how viable the retail space would be. At the time of the development, the developer was starting with a blank canvas and building something for which there is no comparison or equal.”

“In a project of this magnitude that was fast tracked, there were bound to be difficulties, issues and challenges,” says Dene Oliver of OliverMcMillan. “At all times, Fremont was willing and able to understand where we were and where we were trying to get to, and they wanted to know what they could to facilitate it. In our 25-year history we have never had a lender that has been any better to work aggressively to understand a project, to put financing together and then to make the financing work once it was in place.”

Fremont’s leap of faith has paid off.

There is already rapid lease up of luxury apartments, top-notch performance by retail tenants and plans for future residential and office development in place.

Michigan Avenue Tower is a 220-unit condominium building in Chicago.

Fremont took another leap when financing the recent development of Michigan Avenue Tower, a high-rise, 221-unit condominium tower in Chicago’s museum campus area. “This deal was interesting in that local developers which have built a lot of smaller projects set out to build a substantially larger project than they had done historically,” says Manlin. “So there was some concern in the marketplace about their ability to execute.”

For Fremont, the uncertainty of the borrower’s experience and financial strength relative to the size of the $58 million deal was mitigated by 1250 S. Michigan Limited Partnership’s decision to hire a team of experienced contractors, architects and marketing representatives to help with the project.

“We were able to get comfortable with this project because a team was put in place, and by virtue of the fact that prior to construction, 75 percent to 80 percent of the units were pre-sold,” Manlin says.

“Other banks just didn’t seem to get it,” says Wexford Bank Group’s Matt Gurvey of the development. “Fremont understood our needs, the weaknesses of the loan, but also the strengths of the loan — and then those overcame any potential concerns they may have had.”

The project is now 80 percent complete in terms of construction and 90 percent of its units have been sold.

“They really grabbed a significant portion of their fair share of the market,” Manlin says of the developer’s success with the project. “It’s been nothing short of a home run,” he says, noting that when the partnership began selling the Michigan Avenue Tower units, it was pioneering the demand for high-rise in the museum campus marketplace, but since starting sales activities, many local developers are following suit.

In the case of Huron Plaza, a condominium conversion from a 419-unit apartment complex, the project’s developer, Crescent Heights, had certainly proven itself as one of the nation’s largest condominium developers.

What was not so clear was the price point for the submarket, Chicago’s newly designated Cathedral District — two blocks west of Chicago’s Michigan Avenue retail corridor, where Huron Place was being developed.

Fremont’s $73.2 million loan funded Crescent’s conversion of the 460-unit building, originally developed in 1980, into luxury condominiums, a 260 car-parking garage and 10,000 square feet of ground floor retail space.

“There hadn’t been a conversion of this magnitude in this type of location in Chicago for probably 5 years,” Sharp says. “So it was difficult to quickly understand and really do a good job of judging when we could expect the borrower to sell out the units on a per-foot number.”

Manlin notes that all conversion projects, regardless of their market, present special challenges for lenders.

“In a conversion, prior to the acquisition of the building, you’re advancing significant dollars in advance of establishing a market,” he says. “So, it takes a greater amount of confidence in the overall market as well as the sponsor’s ability to execute in order to be comfortable taking those risks.”

“We pursue lending relationships with institutions that truly understand the intricacies of the conversion business. It is crucial that our lenders have the ability to be flexible and creative in structuring the terms of the transaction, and Fremont responded to that need,” says Bruce Menin, president of Crescent Heights, which has worked most recently with Fremont on several other condominium developments in California and Hawaii. “Fremont took the time to understand the Chicago condo market and created a unique financing package specially tailored to our needs.”

Fremont’s Chicago office has a knack for scoping out successful developments, but what is it exactly that makes so many developers choose Fremont over other lenders?

Since the Chicago office opened in 1997, its phenomenal growth has enabled it to handle increasingly larger transactions, from $10 to $15 million in its early days, to a current average deal size of $30 to $40 million. The office now finances deals in midwestern states including Illinois, Iowa, Nebraska, Missouri, Indiana, Ohio, Kentucky and Minnesota.

“The types of deals that we have available to us because of our size and our capital base is a much a better selection,” Manlin says. “All four of these developments are trophy transactions that we would not have been able to do five years ago.”

The key to this success, he says, is that the company, and the Chicago office in particular, are known for their responsiveness, commitment and depth of due diligence.

“We are very earnest in our desire to get the deal done and bring decision making to bear early on so that we can give real indications of our willingness to do the transaction,” says Manlin.



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